Capital Structure Vs Financial Structure

In financial management, both capital structure and financial structure are studied. Both are very important for knowing the financial position of company deeply. But there are also differences between capital structure and financial structure which we have explained in following words.




1. Meaning

- Meaning of Capital Structure

Capital structure is the mixture of long term capital and debt resources. Check your balance sheet and you will find that there will be 3 main sources of capital. One is equity share, second is pref. share and third is debenture. Fund from these sources are collected and used for buying the long term and short term assets. If more briefly, we have to define the capital structure, we can say that total fund is financed from share capital and debt.

- Meaning of Financial Structure 

Financial structure is the structure of balance sheet. It means sources of buying both current and fixed assets. Whole liability side of balance sheet will be financial structure. In financial structure, both long term liabilities and short term liabilities will be included. All the current assets and fixed assets are bought from long term and short term liabilities. For example, long term liabilities of a company is 80% of total liabilities.  Current liabilities of a company is 20% of total liabilities. From these ratio, we know that financial structure has been divided into 80:20 proportion of long term liabilities and short term liabilities.

2. Basis

- Basis of Capital Structure 

Financial Structure is the base of capital structure. Whole capital structure is the part of financial structure.

- Basis of Financial Structure

There are lots of basis of financial structure. We can also say the factor which affects the financial structure. Nature of business, type of business, investment requirement, long term and working capital requirement, cost of capital, cash flow ability of company and leverage are its main factor which affects it.

3. Example

- Example of Capital Structure 

For example

Long term debt is $ 30,000
Equity Share Capital is $ 70,000
Pref. Share Capital is $ 10,000
Retained Earning is $ 5000
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Total Long term Fund = $ 115000
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So, in capital structure, there are 4 main items

Equity share capital : Pref. share capital : Long term debt : Retained earning

7:1:3:0.5

- Example of Financial Structure 

Long Term Liabilities is $ 115000
Current Liability is  $ 85000

Long term liabilities : Current Liabilities

115 :85

Related : Importance of Capital Structure